The past few days have seen much turmoil in both the political arena and the global stock markets. Politicians in both the United States and Europe are being forced to grapple with high levels of fiscal debt, and equity markets have turned down, reflecting this uncertainty.
Currently high levels of national debt are the result of programmed stimulus spending that was designed to help the Western world recover from the “Great Recession” of 2007-2009. In hindsight, these programs worked. We have witnessed positive, if sluggish economic growth since then. However, continued stimulus spending has now raised debt levels to dangerous levels in some weaker members of the European Union, and has hit the self-imposed “debt ceiling” of the United States.
In both Europe and the U.S., politicians are now forced to confront their fiscal reality. They are not in the position to pass the problem on to their successors. This is similar to the scenario that Canada and its provinces faced in the mid-1990’s. Faced with potential ratings downgrades and up against its own credit limits at that time, the Jean Chretien and Paul Martin led Canadian government faced the issue straight on and solved it in an impressive manner. For that, they are well remembered. Now, leaders in the other Western countries are facing the same reality. They have no choice but to react.
The political reaction will be simple. First, government spending everywhere in the developed world (even Canada) will be reined in. Second, and more difficult, will be tax increases. This will be particularly difficult in the U.S., where Americans, who are the least taxed people in the developed world, are loath to accept increases. This is sure to be a central issue in the 2012 election year.
At the end of last week, Standard & Poor’s downgraded its credit ranking on U.S. debt below AAA for the first time since 1917. This has prolonged the already lengthening disruption of equity markets.
At this time, we wish to revisit our investment strategy for our clients. Amidst the turmoil, please keep in mind the following:
- Global economies are growing, albeit sluggishly in the developed world. While there is the possibility of a “double dip” and the return to economic recession, we do not see strong evidence of that happening. Unemployment is slowly falling, factory orders are on the rise, and the demand for basic commodities is as strong as ever.
- The global supply chain disruptions that were caused by the earthquake and tsunami in Japan last March are now being resolved.
- Consumer debt levels, which “hit the wall” a few years ago, are receding. In the U.S., where consumer debt is highest, people really are paying down their credit card, bank, and mortgage debt. Household debt obligations are back down to their levels of almost 20 years ago. Eventually this will translate into a recovery in consumer spending, which is vital to long term economic growth.
- Corporate fundamentals are strong and growing stronger. In the second quarter, 75% of U.S. public companies beat the “street estimates” on their earnings reports. The balance sheets of the companies that we own are very strong. The debt levels of government are not mirrored in the corporate world. Quite the opposite is true. The corporate world has scarcely ever been in better shape.
- The great majority of the companies that we are invested in have delivered dividend increases in the past 12 months. There is no greater indication of a management’s and board of director’s faith in the future prospects of a company and the environment that it operates in.
- Corporate valuations in the equity markets, even before the recent downturn, were modest in comparison to previous market cycles. With this recent correction, there are some outstanding bargains in these markets.
Over the past fifteen years, there have been several dramatic stock market downturns. During this period, we have had the Asian debt crisis, the “tech wreck”, the 9/11 terrorist attacks, and the credit freeze of 2008-2009. Following each of these events, the stock market recovered, and strong investment returns were realized. We know that these events are hard on the psyche of investors. However, this too will pass, and in time we will resume generating the positive performance returns which typically result from Rempart’s investment philosophy.
August 2011
The past few days have seen much turmoil in both the political arena and the global stock markets. Politicians in both the United States and Europe are being forced to grapple with high levels of fiscal debt, and equity markets have turned down, reflecting this uncertainty.
Currently high levels of national debt are the result of programmed stimulus spending that was designed to help the Western world recover from the “Great Recession” of 2007-2009. In hindsight, these programs worked. We have witnessed positive, if sluggish economic growth since then. However, continued stimulus spending has now raised debt levels to dangerous levels in some weaker members of the European Union, and has hit the self-imposed “debt ceiling” of the United States.
In both Europe and the U.S., politicians are now forced to confront their fiscal reality. They are not in the position to pass the problem on to their successors. This is similar to the scenario that Canada and its provinces faced in the mid-1990’s. Faced with potential ratings downgrades and up against its own credit limits at that time, the Jean Chretien and Paul Martin led Canadian government faced the issue straight on and solved it in an impressive manner. For that, they are well remembered. Now, leaders in the other Western countries are facing the same reality. They have no choice but to react.
The political reaction will be simple. First, government spending everywhere in the developed world (even Canada) will be reined in. Second, and more difficult, will be tax increases. This will be particularly difficult in the U.S., where Americans, who are the least taxed people in the developed world, are loath to accept increases. This is sure to be a central issue in the 2012 election year.
At the end of last week, Standard & Poor’s downgraded its credit ranking on U.S. debt below AAA for the first time since 1917. This has prolonged the already lengthening disruption of equity markets.
At this time, we wish to revisit our investment strategy for our clients. Amidst the turmoil, please keep in mind the following:
Over the past fifteen years, there have been several dramatic stock market downturns. During this period, we have had the Asian debt crisis, the “tech wreck”, the 9/11 terrorist attacks, and the credit freeze of 2008-2009. Following each of these events, the stock market recovered, and strong investment returns were realized. We know that these events are hard on the psyche of investors. However, this too will pass, and in time we will resume generating the positive performance returns which typically result from Rempart’s investment philosophy.